Success of hedge funds pushes cryptocurrency market
Online currencies such as Bitcoin and Ethereum are propelling hedge funds that back them to new financial heights, according to new research, with the number of those that specialise in cryptocurrencies alone increasing.
According to data compiled by fintech research house Autonomous NEXT, there are now 110 hedge funds specialising in the crypto or blockchain market that represent around $2.2 billion (£1.66 billion).
This figure represents a very quick increase not only in the popularity of cryptocurrencies, but also the emergence of specialist hedge funds to cover them. At the end of 2016, there were only 26 such hedge funds; since August 29 2017, the number has doubled from 55.
Some of this is due to the apparent strength in cryptocurrencies that have been observed in recent months.
Earlier in October, the price of Bitcoin smashed through the $5,000 barrier to an all-time high of $5,243 after starting 2017 with a value of $966. In the past year, the currency has soared by more than 750 per cent in value and is now worth four times as much as an ounce of gold.
Cryptocurrencies are a form of digital money that are designed to be secure and – in many cases – anonymous. By using decentralised technology, users can make secure payments and store money without the need to use their personal details or a bank.
Bitcoin and others like it have a public ledger, called a blockchain, held and updated by currency holders which holds a complete record of all transactions each bitcoin has gone through.
The total market capitalisation for cryptocurrencies has ballooned to be worth more than $170 billion from just $13 billion at the start of the year.
Market commentators believe that recent growth will promote many more hedge funds attempting to leverage growth in the value of such currencies in order to generate returns for investors.
In fact, investors are gaining exposure to these assets “at just the right time”, writes Seekning Alpha’s Gary Bourgeault.
He continues: “Even now, the majority of the over 1,000 cryptocurrencies available will fail. But as the market continues to slowly mature, there are some cryptocurrencies that are showing signs of sustainability.
“But when you consider it doesn't take a lot of money to generate some extraordinary returns, the reward far exceeds the risk, unless someone gets too greedy and invests money they can't afford to lose.”
Though familiar institutional investors have largely ignored these currencies, alternative investment specialists are launching everything from funds to regulated exchanges to make the most of the opportunity.
Indeed, this month an entrepreneur and venture capitalist Rick Marini opened a new fund of funds for cryptocurrencies called Protocol Ventures with $1 million of his own capital.
The fund has already invested stakes in MetaStable Capital, one of the first and largest dedicated crypto vehicles available to investors, and a smaller fund called Neural Capital, which has made headlines thanks to its successful hedges on Ethereum, another leading currency.
Marini explained: “The goal is to provide diversification for investors. With this volatility you want to invest enough that the upside is meaningful, but not so much that it would hurt your portfolio in the case of a loss.”
There are also new frontiers for cryptocurrency interest. Though interest is high in places such as the US and Switzerland, Japan has quietly become one of the largest hubs for trading Bitcoin.
After opening up the market for virtual currencies, Japan’s government is now moving to regulate the crypto market.